Business Context and Reporting Period
This Form 10-Q was filed by MDC Partners Inc. (the source filing predates the company name Stagwell Inc.) for the quarter ended March 31, 2015. The company provides advertising, marketing communications, consulting, analytics and related services through Strategic Marketing Services and Performance Marketing Services.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $302.2 million | $274.9 million | 10.0% increase |
| Operating profit | $5.2 million | $11.6 million | 55.1% decrease |
| Operating margin | 1.7% | 4.2% | Down approximately 2.5 percentage points |
| Loss from continuing operations | $23.4 million | $7.2 million | Loss increased $16.2 million |
| Net loss attributable to MDC | $32.1 million | $8.8 million | Loss increased $23.2 million |
| Loss per diluted share | $0.65 | $0.18 | Loss increased $0.47 |
| Net cash used in operating activities | $119.8 million | $39.3 million | Use increased $80.5 million |
Revenue growth comprised $20.4 million of organic growth, $12.4 million from acquisitions and a $5.4 million unfavorable foreign-exchange impact. Strategic Marketing Services revenue increased 11.9% to $240.4 million, while Performance Marketing Services revenue increased 2.9% to $61.8 million.
Cash and cash equivalents were $17.6 million at March 31, 2015, including $6.2 million restricted or otherwise unavailable for general corporate distribution. Working capital was negative $284.0 million. Accounts receivable were $453.4 million, compared with $355.3 million at December 31, 2014.
Total debt was $762.3 million, including $735.0 million of 6.75% Senior Notes due 2020 and $19.6 million drawn under the revolving credit facility. Approximately $267.5 million remained available under the $325 million revolving facility. Shareholders’ deficit was $398.9 million, and redeemable noncontrolling interests were $202.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 10.0%, but operating profit declined because of higher staff costs, direct pass-through costs and depreciation and amortization, as well as higher corporate expenses.
- Marketing Communications Group operating margin declined to 6.5% from 8.0%. Strategic Marketing Services margin fell to 7.8% from 11.2%, while Performance Marketing Services improved to 1.3% from negative 3.3%.
- Corporate expenses increased by $4.0 million, principally because of $6.2 million of legal fees, including $5.8 million related to the SEC inquiry.
- Other expense increased to $18.0 million from $6.6 million, primarily because of an unrealized foreign-exchange loss of $18.5 million versus $6.6 million.
- Net interest expense increased to approximately $15.0 million from $12.6 million, largely because of the additional $75 million of Senior Notes issued in April 2014.
- Discontinued operations, relating to Accent Marketing Services, produced a $6.3 million loss, including a $4.7 million loss on disposal, compared with a $0.3 million loss in Q1 2014.
- Operating cash flow deteriorated substantially, driven by the net loss, a $97.8 million increase in accounts receivable and a $42.7 million decrease in accounts payable, accruals and other liabilities.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance in the filing. Management expects staff-cost ratios in Strategic Marketing Services to normalize toward the 2014 annualized rate of approximately 59% and stated that it expects to remain in compliance with debt covenants over the following twelve months.
- The company was cooperating with an ongoing SEC investigation involving executive expense reimbursements, goodwill and other accounting practices, and third-party securities trading. The ultimate outcome, potential sanctions and related costs were described as unpredictable.
- The CEO agreed to reimburse the company $8.6 million for perquisites and expenses from 2009 through 2014. The reimbursement was expected to be recorded as income in Q2 2015, with no expected impact on previously issued financial statements.
- The company implemented new aircraft-use and travel-and-entertainment policies, hired compliance personnel and established quarterly Audit Committee reviews.
- Deferred acquisition consideration totaled $200.8 million. Redeemable noncontrolling interests include approximately $202.3 million of put obligations. Management estimated potential future payments of approximately $21.6 million for currently exercisable or scheduled put rights, plus $180.7 million payable upon specified employment termination or death events.
- The company faces risks from client concentration and retention, economic conditions, key-person dependence, acquisitions, foreign exchange, debt covenant compliance, liquidity needs and potential SEC-related liabilities or reputational damage.
- At March 31, 2015, the company reported compliance with its revolving credit facility covenants. Its total leverage ratio was 4.1 versus a 5.5 maximum, fixed charges ratio was 2.4 versus a 1.0 minimum, and covenant EBITDA was $183.6 million versus a $105.0 million minimum.
Important Facts for Investors to Verify
- Confirm the issuer identity and corporate-name history, because the supplied filing is for MDC Partners Inc., while the request identifies Stagwell Inc.
- Review the SEC investigation, the scope of requested documents, potential enforcement outcomes and whether the $8.6 million reimbursement was received and recorded as expected.
- Assess whether the sharp first-quarter operating cash outflow and negative working capital reflect normal seasonality or a continuing liquidity concern.
- Reconcile total debt, revolver availability, covenant calculations and upcoming Senior Notes maturity and interest requirements.
- Evaluate the assumptions underlying deferred acquisition consideration and subsidiary put obligations, including potential cash funding requirements.
- Monitor foreign-exchange exposure, particularly the reported estimated $2.1 million financial-statement impact for each one-cent change in the U.S. dollar/Canadian dollar exchange rate.